Interview with Sir Martin Sorrell - Chief Executive of WPP

The following interview was conducted on the afternoon of Monday, 13 September 2010 at Beijing's Park Hyatt hotel.

The Economic Observer:Because you're such a large company, you often face issues or problems related to mergers and acquisitions. Could you tell us a little bit about what kind of problems you face and what mergers or acquisitions you have recently engaged in?

Sir Martin Sorrell: We announced one today - DPI. It's a Chinese acquisition that we announced just today.

I think it's particularly difficult in our industry because our biggest investment is in people. We have 14 billion dollars of revenue and we invest about 9 billion in people. So with a company such as DPI based in Hong Kong and Guangzhou and Shanghai, the dynamics would be pretty much the same. The key thing is people. I would argue that all companies are about people in some way. But when you make acquisitions in our business, the critical investment is in people and thus making sure that the people are in good shape in the short- and the long-term is critically important. So the recruitment, retention and incentivizing of those people is absolutely critical. I would say that's the dynamic that is really important, and I would argue that that's the same whether it's an industrial company or a professional services organization like our own.

And if you say to our people–like we had a lunch to celebrate the acquisition, we had clients there, and we had probably about a dozen of our people there–and if you said to them (our people) what is the most important issue or problem that they had, they would say talent, talent, talent.

It's a key issue in a market like China which is expanding at the moment for us by about 10-11-12 percent–and in fact in the last few months has grown even faster. People are the key issue.

EO: So as such a large group, there are obviously a lot of subsidiary companies. How does WPP integrate and manage these companies? And a follow-up question: how do you personally deal with all the reports and things that come across your desk?

MS: Although there appear to be a lot of companies, there are really only about twelve when you boil it down. There are two mechanisms we are trying to develop to improve the integration.

But going back to the first question, if talent is the most important thing, which it is, the clients want the best talent to work on their business. The clients don't really worry about which companies work on the business, they worry that they get the best people within those companies. At WPP, we have 140,000 people in about 106-7 countries, and every client wants the best people.

So there are two mechanisms: 1) For all our top 30 clients, there are now team leaders for each account. Ford, Proctor&Gamble, Unilever, Microsoft, Nestle … those would be our top five. We have a person who runs the business across the whole of WPP. That's at the global level.

2) We also think local is very important, so we have country managers. It's in its early days. For example, in China, TB Song is our Chinese country manager. The reason is that he and the others we have in Venezuela, Spain, Holland, in other countries, we want them to focus on three things: One is make sure we have the best people locally. Second, that we identify the multinational companies of the future - that is, the strong local companies that are going to be the multinational companies of the future. And thirdly, that we identify acquisitions. So for example, the acquisition by G2 of DPI came out of conversations with clients and recommendations from clients, locally here in China. And that's how we develop the relationship with DPI and develop the whole approach.

So those are the mechanisms for encouraging integration.

In response to your second question, we have a three year plan for each of our companies. We have a budget for each year. We update the three-year plan every year. I have regular meetings with the companies in New York every quarter and we redo our forecasts. So that’s internal.

So I spend about a third of my time internally, about a third of my time externally with clients, and about a third of my time (externally) with investors, institutions, press, trade press, analysts. So, a third internal, a third with clients, and a third with you (press and other external parties).

EO:With the rise of new media, a lot of traditional media are losing their power or position….

MS: Although when we came out with our (1H Interim 2010) results, we said America and traditional media bites back. Because in the last seven months, 8 months actually as I've seen the August numbers, we've seen traditional media getting stronger, relative to new media.

On the other hand, new media is now 27-28 percent of our business. The objective of it is to be a third (of our total revenues), and it continues to grow rapidly. But one of the interesting things about the last few months is that traditional media has gotten stronger.

EO:How do you see the future for traditional media? And will it remain a viable option for advertisers?

MS: It's going to still be very important. You have to define what you mean. I think network television - free to air television - remains very strong. So the traditional CCTV, Shanghai Media Group, Hunan Media Group businesses will remain strong, for example, in a country like China ... as it will do in the West too.

But it depends on how you define television. If I receive a television program on this (points to Blackberry) is that television or new media? So there's a definitional problem.

In the same way, if I read a newspaper, which I do now, if I read the Financial Times or the WSJ on my iPad, is that a newspaper or not? My view is it's a "new" newspaper, it's not a "traditional" newspaper.

I think free-to-air television will continue as long as you have the Beijing Olympics, as long as you have the South African World Cup, as long as you have the Chinese New Year's celebration on CCTV, as long as you have China's Got Talent, you're going to have large live audiences. So network television will always be important in delivering those large audiences.

On the other hand, IPTV, internet-delivered television, is going to become more and more important. Particularly as broadband becomes more prevalent, more widespread and content improves.

So, the alternatives ... .

Now I think the most challenged medium is newspapers. Not so much in the fast-growing economies of Asia, Latin America, Africa, Middle East, and Central and Eastern Europe. That will come later.

But in the West - in the US and Western Europe, principally UK, France, Germany, Italy and Spain - newspapers are going to be increasingly challenged.

Magazines will also be challenged. But we know from the data that women, for example, like reading magazines. So they're not going to disappear. More niche, more specialized magazines will continue to be successful.

Radio is very fragmented. In my view it will also be under pressure because of the fragmentation, but not as badly as newspapers.

Outdoor media, I think will continue to grow. I think it's an interesting medium, because it's quite specialized.

Having said all that, there are three things that are going to happen:

One is: consumers will have to pay for content, even online. So we think the paywall experiments by (Rupert) Murdoch and News Corp are the right thing.

The second thing is there will be more consolidation, more M&A (in the media industry).

The final thing is that governments, on behalf of citizens, are going to have to decide whether they subsidize old media to protect them. So, for example, you have very successful people buying newspapers as trophy assets.

You have the BBC with its license. We pay 3.5 billion pounds a year to the BBC in cash every January 1st as license tax.

In Australia, interestingly, the government rebated 200 million Australian dollars to the three TV networks because of digital competition. So subsidy is going to balance …

Do I think I could do your job by using my mobile phone, or my blog? The answer is yes. Will I do as good a job as you? Maybe yes, maybe no, but I don't think so. So we have to decide what we want - as electorates, as taxpayers, as citizens - and governments have to decide whether they subsidize the old media as they come under increasing pressure.

The one-sentence answer to your question is that newspapers have the biggest challenge.

EO:With the diversification of media, clients are investing against more platforms. How does WPP deal with this issue or this problem?

MS: The fragmentation is a good thing from our point of view because it makes us (WPP) more important in the process. We don't call it media planning and buying, we call it media investment and management. The reason is that we look at the amount of money our clients are spending, and whether it should be smaller or larger or the same, as well as where they should spend it.

And of course as it gets more fragmented if you have Baidu and Google and Facebook, Sina and Tencent and QQ ... it gets more complex, which is good for us.

The key issue for us is if we have access. So if we have access to all of these media on behalf of our clients, that's a good thing.

The media owner has a much more difficult task because the media owner has to decide which technology, which channel they want to use. Unless they decide to be in the communications business and do television, newspapers, magazines, outdoor, radio, new media, do everything, right? It's a question of how you define their business.

For us we look at the whole business, so if there's a new channel ... for example, if Facebook comes along - a few years ago it was Second Life virtual reality, but that did not get the traction - we don't mind where it (media channel) comes from. In fact the more fragmented it is, the better it is as long as we have access.

EO:Currently, in which regions are your major markets? And what is special about these regions?

MS: The US is about 36-37 percent. Western Europe is the same, about 36-37 percent. Asia, Latin America, Africa, Middle East, and Central and Eastern Europe (combined together) are the remaining 26-27 percent.

If you look at it by country: We have 14 billion dollars of revenue. The US is 4 billion, UK is 2 billion, Germany is 1 billion, China is about 900 million, and France is roughly the same size, slightly smaller. So those would be our top 5 markets, by country.

The growth at the moment is quite strong. Rupert Murdoch said the US was inexplicably strong, and I'd agree with that. Last month we had a strong month. We actually reached 10 percent growth on month-to-month, like-for-like comparison in August, which is quite extraordinary. And we had our best month of the year this August. We were up 8 percent across the world, like-for-like, so America's been strong.

But growth in China in the last 3 or 4 months had a slow start but is (now) very strong. In India, it's currently about the same. But India has been stronger ... when I say stronger, stronger than China.

So both India and China are leading the world in terms of our growth, which is what you would expect.

The soft spots are Japan ... South Korea has been difficult ... and Australia has been difficult. Western Europe is difficult. But all these countries are less bad, if you follow my English, less bad than it was. In other words, it's getting better.

But I have been surprised. When we started our year, we were budgeting zero revenue growth on last year. Then after the first quarter we went to 2 percent, and after the second quarter we went to 4 percent. By the end of August we are now 3.5 percent ahead. So we are strong against the forecast.

Now having said all that, there are two big issues.

One is euro-zone fiscal contagion - meaning that the worries of Greece, and Portugal and Ireland will spread to the rest of Western Europe.

And the second is what will happen in the US next year. The Bush tax cuts will come to an end on January 1st. There are concerns about the Obama administration's attitude to business, in the sense that business is highly profitable as a proportion to GNP.

There is a feeling that the administration believes business has to pay more in tax, particularly when sectors of the economy have been asked for sacrifices.

Having said that, the two interesting things recently have been the policy responses from (Fed Chairman Ben) Bernanke at Jackson Hole (annual conference), where he said he would use quantitative easing. He wasn't precise.

And the second is Obama's response in relation to infrastructure, R&D tax allowances, and the statement that 9.6 percent unemployment is unacceptable. And, he (Obama) has a mid-term election coming up in November.

So we've been surprised by the growth of our industry this year. We're concerned about next year, particularly in the US, but it's still early days ... we have to see how things turn out.

EO:So what's your target over the coming five years? What's your goal? And what expectations do you have of the Chinese market over that time?

MS: We're now close to a billion dollars (in revenue) in China, so I would like to get to a billion dollars very quickly.

I would like China to be clearly our third largest market. Germany is about 1.1 billion (dollars). Germany actually, to be fair, is what I would call the strong man of Western Europe – (Germany's) export performance has been stronger, the economy has been stronger recently. But I would like China to be clearly our number 3 market. The reason why we're so big in the UK is because that's where we started. It's not a logical weighting in the context of the worldwide economy, but it's because of (WPP's) history.

China would have to double from its present levels with the UK standing still, which is unlikely, for it to overtake.

Now, having said that, I think in the fullness of time, China clearly will be our second largest market. China is already the (world's) second largest economy by GNP. It started the year just behind Japan at about 4.5 trillion dollars, Japan was about 5 trillion (dollars), and America was at around 14 trillion (dollars). So China now is already the second largest economy. We want it to be our second largest market.

We'll do that by organic growth principally, but we will make acquisitions, like the one we did today. And I would say that my ambition would be to get our business (in China) to 1 billion dollars fairly quickly. And then we'll set about trying to see how we get to 2 (billion dollars).

EO:So you mentioned before that your targets have been increasing. How have you managed to sustain business growth in the wake of the financial crisis?

MS: We've done very well on new business. But frankly, the markets have surprised us with their relative strength. Having said that, there's a phrase in English – there's the "dead cat bounce."

A bit of it is because it's an improvement on a terrible year last year. Part of it is because we got a fiscal stimulus from Obama, and China and everywhere. Because the worldwide economy is 65 trillion dollars and the stimulus was about 12 trillion dollars by governments, the stimulus was equal to about 25 percent of GNP.

The other thing is that having gone through such a tough year, people think that any recovery is good news.

And I think the other thing that happened - and I think this is probably the most important point - was that the Lehman crisis happened in September 2008. After that, companies were terrified of bankruptcy. If you remember, Warren Buffett said this is the financial Pearl Harbor. Jeff Immelt at GE said they were within 48 hours or 72 hours of not raising money on the capital markets. So, everybody was terrified.

Most of them (clients) do calendar-year budgets, so when they go into 2009 they're doing their budgets just after Lehman ... and they're terrified. So they were very very focused on cutting costs. 2009 was bound to be a bad year.

2010 - they prepared their budgets this time last year, and the world did not come to an end. Where's the expansion? The expansion is the BRICs, the next-11, as Goldman called it, and what we now call the CIVETS - Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa. So they expand in those areas.

2010 is a better year than we thought because they won a bit of expansion. They realize they [companies] can't cut their costs to achieve prosperity. They have to grow. That is the thing.

So next year, we're sort of in between where we were in 2009 and 2010. The world isn't going to come to an end, but people are quite cautious about next year.

Having said that, every client I talk to says they're doing well. They have strong balance sheets, they've reduced costs, and they've got to where they are not by increasing revenues, but by cutting costs. So we'll see.

EO:Just following on from what you just said, the most recent 1H report, WPP's business growth, is this an indicator for you that the world economy is starting to improve? And where has the recovery been focused, in terms of geographic areas?

MS: The Governor of the Bank of England Mervyn King said to me, "I'm always worried, Martin when your business is doing well, because I know that's the top of the market."

So, I think we should be a bit circumspect.

I think things are better, but you have to get it in perspective. We're not back to where we were, at the revenue level that we were at in 2008. So 2009, we were down 8 (percent) revenue. This year we're saying our second quarter forecast we'll be up 4 (percent) for the year. We're already up 3.5 (percent) ahead in August. So, that's a net four (percent) down over two years. So, we're not back to where we were in 2008.

Interestingly, we indicated in our half year statement that our earnings per share target was to get back to 55.5 pence, which is what we did in 2008.

So, what you have is a very similar pattern to our clients': Top-line is under pressure, not back to 2008. But, bottom line and margins ... margins in the second half of 2009 were the same as they were in 2008, which was a big achievement, and we think our margins in the second half of this year will be better than 2009, and our first half margins (in 2010) were significantly better ... .

So I think we've got ourselves a situation, where from a profitability point of view, we're back to where we were (in 2008). Top line, we may get back (to 2008 levels) next year, but definitely in 2012.

I think the best way to describe it is ... a hard slog. Slow growth ... it's going to be ... it's tough.

The above interview was conducted on the afternoon of Monday, 13 September 2010 at Beijing's Park Hyatt hotel.